A home equity line of credit, or HELOC, is a common way to tap into the equity value in your home. A HELOC gives you access to a credit limit, similar to credit cards, which you can use as needed to pay for home repairs, major purchases, college and other expenses.
When you get a line of credit, you have a period of time upfront to use funds before you must repay the remaining balance. When this time is up, the HELOC has matured. If you still owe, you have a few decisions to make.
TL;DR (Too Long; Didn't Read)
When your HELOC matures, you'll be expected to start repaying the principal and interest accrued. You can also choose to do a refinance or ask to extend the draw period.
HELOC Draw Period
The initial phase of a HELOC is known as the draw period. This is commonly five or 10 years. During this time, you have open access to your credit line. Once you borrow funds, you must make monthly minimum payments, just as you would with a credit card.
Most HELOCs only require you to pay interest on the balance during the draw period. However, doing so significantly delays repayment of the loan balance.
Advantages of a HELOC
A main advantage of drawing on a HELOC as opposed to getting an equity installment loan is flexibility. You don't have to commit upfront to borrowing a specific amount. This makes more sense when your needs are less predictable or you need the funds in incremental periods, such as when paying for college or starting a new business.
If you use the money to build, buy or "substantially improve" the home you used to get the HELOC, then the interest you pay on the line of credit may be tax deductible. However, the Tax Cuts and Jobs Act of 2017 states that HELOCs used to pay for other things, like college or living expenses, do not qualify for this deduction.
HELOC Payback Period
References to maturity in a HELOC typically point to the end of the draw period and the start of the payback period. If you end your 10-year draw period with a balance of $35,000 on a $50,000 line, the remaining balance is normally amortized for a period of 10 to 15 years. Over this time, you repay principal and interest on the balance just as you do on your first mortgage.
Deciding to Refinance or Extend
Once you repay your remaining loan balance, the home equity line of credit is resolved. If you still have access to equity in your home, you can open another line and set up new draw and payback terms. Another option when you have a balance at the end of the draw period is to request a refinance or an extension of another five to 10 years on the HELOC. If you have a low balance after the draw period and need more access to funds, lenders will usually work with you.
- IRS: Interest on Home Equity Loans Often Still Deductible Under New Law
- HSH: Guide to Home Equity Loans and Home Equity Lines of Credit
- Nerdwallet: HELOC: Understanding Home Equity Lines of Credit
- UW Credit Union: What Do I Do When the Draw Period Is Ending for My Home Equity Line of Credit (HELOC)?
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.